IDEA CELLULAR LTD

RESEARCH
EQUITY RESEARCH June 10, 2008

RESULTS REVIEW Idea Cellular Limited Buy

Riding high on growth
Share Data
Idea Cellular Ltd (Idea) reported another good quarter with net sales of
Market Cap Rs. 262.61 bn
Price Rs. 99.65 Rs. 67.2 bn and net profit crossing the Rs. 10 bn mark to end the FY08. The
BSE Sensex 14,889.25 key performance indicators of the quarter compared to previous quarter
Reuters IDEA.BO were:
Bloomberg IDEA IN
• Additions of 2.9 mn subscribers led to a 40 bps growth in market share to
Avg. Volume (52 Week) 1.86 mn
52-Week High/Low Rs. 161 / 89 16.2% in 11 operating circles.
Shares Outstanding 2,635.4 mn • Increase of 14%, 2.9%, and 9% in subscribers, ARPU, and MoU,
respectively, boosted the revenue to Rs. 19.7 bn.
Valuation Ratios (Consolidated)
• Revenue growth reflected in the 16.4% rise in EBITDA to Rs. 6.6 bn;
Year to 31 March 2009E 2010E
EPS (Rs.) 4.2 7.1 however, higher roaming and access charges restricted the margin to
+/- (%) 7.1% 68.7% 33.7%, fully offsetting the benefit from decrease in acquisition and
PER (x) 23.6x 14.0x services cost per subscriber.
EV/ Subscribers (Rs.) 8,311.1 5,290.6
• Net profit increased to Rs. 2.8 bn while margins expanded marginally by
EV/Sales (x) 3.5x 2.5x
EV/ EBITDA (x) 10.8x 7.7x 50bps to 14.2% due to benefit of economies of scale in subscribers
acquisition cost.
Shareholding Pattern (%)
Considering Idea’s constant endeavour to increase its market share and the
Promoters 57.69
FIIs 7.71 response it has received from the UP and Rajasthan circles, we expect that
Institutions 2.61 the Company would be able to command 10.5% of the overall wireless
Public & Others 31.99 market share by FY10. However, we believe that the increase ARPU and
MOU is not sustainable with the tariff rates dropping continuously. Factoring
Relative Performance
the above, we have revised our estimates for the sales and expect it to grow
200 at a CAGR of 37.3% for FY08–FY10E subject to a timely roll out of
150
operations in Mumbai and Bihar by the Q2’09 and in Tamil Nadu by Q3’09.
100
50 Key Figures (Consolidated)
Quarterly Data Q4'07 Q3'08 Q4'08 YoY% QoQ% FY07 FY08 YoY%
0
(Figures in Rs mn, except per share data)
May-08
Aug-07

Nov-07

Apr-08
Jun-07
Jul-07

Sep-07
Oct-07

Dec-07
Jan-08
Feb-08
Mar-08

Net Sales 13,084 17,081 19,724 50.7% 15.5% 43,664 67,200 53.9%
EBITDA 4,371 5,709 6,644 52.0% 16.4% 14,653 22,556 53.9%
IDEA Rebased BSE Index EBITDA Margin 33.4% 33.4% 33.7% 33.6% 33.6%

Subscribers 14 21 24 71.3% 14.0% 14 24 71.3%

Average revenue per user (ARPU) 317 279 287 (9.5%) 2.9%
Average minutes of use per user 387 377 411 6.2% 9.0%
Average Realised Rate (ARR) 0.82 0.74 0.70 (14.8%) (5.6%)
Blended Churn 4.2% 4.7% 4.6%

Per Share Data (Rs.)

Normalized EPS 0.7 0.9 1.1 42.2% 15.6% 2.2 3.9 83.2%

Please see the end of the report for disclaimer and disclosures. -1-

EQUITY RESEARCH
Increased Subscribers and
bloated ARPU fuel the revenue
growth
Year ends with coverage of
2,476 census towns, 10,832
population centres
MOU and ARPU increase
despite tariff cuts
Please see the end of the report for disclaimer and disclosures.
IDEA CELLULAR LTD
RESEARCH
June 10, 2008
Valuation
At the current price of Rs. 99.65, the stock is trading at a forward P/E of
23.6x FY08E and 14x FY09E. We valued Idea using SOTP and arrived at a
target price of Rs. 137. For valuation of the mobile business, we have used
DCF model assuming Rf 7.75%, Ke 15.5%, Kd 6.3%, WACC 14% and
terminal growth rate 8%. We remain unchanged on our value for Idea’s 16%
stake in Indus Tower at Rs. 37 per share. Based on our valuation of the
Company, we reiterate our rating of Buy.
Result Highlights
On a year-on-year basis, Idea has shown remarkable performance by
recording a 53.9% increase in revenue to Rs. 67.2 bn; 53.9% growth in
EBITDA of Rs. 22.6 bn; and more than two-fold increase in net profit to
Rs. 10.4 bn. Revenue were propelled by a 71.3% increase in subscriber base
to 24 mn and an 80% increase in total minutes of usage to 27,824 mn. While,
the 53.9% EBITDA growth and 108% adjusted net profit growth was
attributed to the revenue growth. Nevertheless, the economies from
expanding operational scales supported the EBITDA margin to remain intact
at 33.6% and net profit margin to increase by 406 bps to 15.6% despite
increasing network operating costs.
Quarter Review
During the quarter, adjusted net sales increased 50.7% yoy and 15.5% qoq
to Rs. 19,724 mn driven by 2.9 mn addition to subscriber base and 2.9%
increase in ARPU to Rs. 287, offsetting lower Average Realized rate (ARR).
By the end of the fourth quarter, Idea has expanded its subscriber base to
24 mn on the back of continuous widespread of the network and improved
share to 18.8% in the total net additions.
Despite the market trend of declining ARPU, the Company was able to report
an increase in ARPU to Rs. 287 from Rs. 279 in Q3’08. The major
contributors were the 9% increase in average minutes of usage (MoU) to
411 min partially attributable to seasonality effect and the reduction in the
blended churn to 4.6% suggesting improvement in customer response.
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 IDEA CELLULAR LTD
RESEARCH
EQUITY RESEARCH June 10, 2008

However, in the environment of reducing tariffs and increasing competition,

we do not expect the same to be sustainable.

EBITDA and EBITDA margin grew by 16.4% to Rs. 6,643.6 mn and 26 bps to
33.7% due to a reduction of subscriber acquisition cost by 203 bps as a
percentage of revenue. However, higher roaming and access charges
partially offset the operating profit growth. The stock based expense of Rs.
37.6 mn charged in this quarter has been treated as an exceptional item of
expenses.

Idea expects Himachal Pradesh, Uttar Pradesh (East), and Rajasthan to

become EBITDA-positive by mid-2008 instead of this quarter, as originally
expected, albeit margins have shown improvement.

Despite a fall in treasury income from Rs. 406 mn to Rs. 201 mn during the
quarter coupled with the foreign exchange loss, which stood at Rs. 27 mn as
against a gain of Rs. 146 mn in the previous quarter, the adjusted net profit
stood at Rs. 2.8 bn, up 16.5% sequentially. However, high growth rates are
likely to be sustained on the back of the Company’s expected forays into the
high ARPU Mumbai and Tamil Nadu circles and cost savings from shared
tower infrastructure.

Key Developments

• Idea plans to foray its mobile services in four new circles: Tamil Nadu
(including Chennai), Mumbai, Bihar, and Orissa. Operations are targeted
to commence in Mumbai and Bihar by Q2’09, and in Tamil Nadu by
Q3’09.
• A private equity firm, Providence Equity Partners would put USD 640 mn
in Idea’s unit, Aditya Birla Telecom (ABTL). The funds will be used for
Operations in four new circles
network rollout and ongoing operations of Aditya Birla Telecom, which
in the pipeline
has a licence in eastern Bihar state. The deal is expected to close by
August 2008.

Please see the end of the report for disclaimer and disclosures. -3-
 IDEA CELLULAR LTD
RESEARCH
EQUITY RESEARCH June 10, 2008

• Idea has joined hands with Tata Communications, Etisalat and HSBC
India for a pilot project that will enable UAE-based NRIs to transfer
money using mobile phones to Kerala.
• The Company has got license for 3G services and for 9 new circles to
emerge as a pan-India GSM operator.
• Spice telecom revives the possibility of a merger with Idea.

Key Risks

• Delay in meeting the estimated deadline for the roll-out in Mumbai, Bihar,
and Tamil Nadu.
• Delay in allotment of spectrum in other circles where the Company has
already got the license.
• The Company has further pushed its breakeven target time for the three
new circles (UP east, Rajasthan and Himachal Pradesh) to Mid–2008.
Longer than expected time in achieving the breakeven will slow down
revenue growth and pressurize EBITDA margins.

Outlook

Idea cellular Ltd has posted excellent numbers for the quarter ended March
2008; on the annual basis also growth of the Company has been
phenomenal. The allotment of spectrum in newer regions like Tamil Nadu
and Orissa are expected to generate impressive future earnings growth.
Mumbai is the highest ARPU-generating circle in the country along with Delhi
and can boost the realisations. Although, penetrating Mumbai and Chennai
may not be easy, with six operators already present. But the tower
infrastructure offered by Indus Towers may reduce costs and time involved in
the rollout. Besides, PE investment in ABTL has also opened up newer doors
and suggests that the Company is undervalued.

We valued Idea using SOTP and arrived at a target price of

Rs. 137. As the consolidation of Indus Towers is still under process, we
remain unchanged on our value for the 16% stake of Idea in Indus at Rs. 37
per share. We value the core business using a DCF model assuming
Rf 7.75%, Ke 15.5%, Kd 6.3%, WACC 14%, and terminal growth rate 8%.

Please see the end of the report for disclaimer and disclosures. -4-
 IDEA CELLULAR LTD
RESEARCH
EQUITY RESEARCH June 10, 2008

Presently, the stock is trading at current market price of Rs 99.65 which is at

forward P/E of 23.6x FY08E and 14x FY09E. Keeping in view the robust
growth opportunities in the Indian telecom market and the ongoing Capex
plans of the Company, we maintain our BUY rating on the stock with a target
price of Rs 137.
Key Figures (Consolidated)
Year to March FY06 FY07 FY08 FY09E FY10E CAGR (%)
(Figures in Rs mn, except per share data) (FY08-10E)

Net Sales 29,655 43,664 67,200 89,464 126,750 37.3%

EBITDA 10,674 14,637 22,556 29,280 41,377 35.4%

EBITDA Margin 36.0% 33.5% 33.6% 32.7% 32.6%

Subscribers 7 14 24 38 60 58.1%
% increase in subscribers 45.3% 90.2% 71.3% 59.0% 57.1%

Average revenue per user (ARPU) 391 332 287 241 216
Average minutes of use per user 289 364 411 386 395
Average Realised Rate (ARR) 1.35 0.91 0.70 0.62 0.55
Blended Churn 6.4% 4.3% 4.6%

Per Share Data (Rs.)

Normalized EPS 0.9 1.9 3.9 4.2 7.1 34.5%
PER (x) 97.3x 47.0x 25.3x 23.6x 14.0x

Please see the end of the report for disclaimer and disclosures. -5-
 IDEA CELLULAR LTD
RESEARCH
EQUITY RESEARCH June 10, 2008

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